If your portfolio is down in 2022, you’re not alone. A broad market sell-off has sent stocks in most sectors tumbling. The sole bright spot in the downtrend has been the energy sector, which has handily outperformed the S&P 500. Specifically, energy ETFs are hitting multi-year highs, making investors look twice as they seek to round-out their portfolios with safer investments in the wake of a pullback. 

The question is, are energy stocks and ETFs the flavor of the month, or will their strong gains continue forward in the near term? Analyst sentiments signal the latter, and there’s speculation that this sector will continue to outperform major indices, even in the event of a recovery. 

If your portfolio lacks energy stocks and you’re looking for a way to capitalize on the momentum of this sector, now’s the time to consider ETFs. Not only are energy ETFs hitting multi-year highs, they offer the diversity and exposure many investors need in this essential sector. 

Energy ETFs are on a roll

A Look at the Energy Sector’s Performance

As a whole, the energy sector is up 20-30% year-to-date. This is in contrast to the S&P 500, which is down more than 10% over the same period. Integrated oil and gas producers like ConocoPhillips (NYSE: COP), Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) lead the way, posting massive gains equivalent to billions in market capitalization. 

It’s not just producers, either. Midstream energy companies, equipment and servicing companies, and refining and marketing companies are all outperforming major indices. The collective performance of the sector is much of the reason energy ETFs are skyrocketing. 

It all begs the question: why are energy stocks surging? In short: uncertain markets favor defensive investments. The essential nature of energy and the global demand that accompanies it position this sector as one to own when the market pulls back. This, and energy companies’ ability to deliver pass-through costs to consumers, thus preserving margins in rising rate environments.  

The Best-Performing Energy ETFs of 2022

With the energy sector on a tear in 2022, ETFs have become extremely enticing. In particular, those with little-to-no exposure to energy markets can find the diversity they need in a sector-focused ETF. And with record-setting year-to-date performance, it’s difficult not to see the appeal of a low-fee fund. 

Here’s a look at some of the top performing energy ETFs so far this year:

  • Direxion Daily Energy Bull 2x Shares (ERX), up ~54% year-to-date.
  • ProShares Ultra Oil & Gas (DIG), up ~51% year-to-date.
  • VanEck Oil Services ETF (OIH), up ~33% year-to-date
  • iShares US Oil Equipment & Services ETF (IEZ), up ~31% year-to-date. 
  • Invesco Dynamic Oil & Gas Services ETF (PXJ), up ~25% year-to-date.
  • Energy Select Sector SPDR Fund (XLE), up ~25% year-to-date. 
  • Vanguard Energy Index Fund ETF (VDE), up ~24% year-to-date

Investors should keep in mind that these ETFs are merely the tip of the iceberg. They represent some of the largest energy ETFs; however, there are roughly 28 active energy ETFs with far-ranging allocations. 

What is Driving Energy Stocks?

One of the major catalysts in the current stock market pullback is the ongoing conflict between Russia and Ukraine. As the world rallies to place a blanket embargo on Russian exports, the energy market stands to see massive price increases. Russia is the world’s second leading producer and exporter of fossil fuels, including both oil and natural gas. Its oil production alone constitutes roughly 12% of the world’s supply.  

Cutting off Russian energy exports shifts that demand elsewhere. The largest beneficiaries of this influx of demand include major producers such as ConocoPhillips, Chevron, Shell and ExxonMobil. As these producers pick up the slack, investors have moved to buoy their stock prices. As these major conglomerates represent significant allocations in the world’s energy ETFs, the performance of these ETFs has seen a proportionate uptick. 

So long as open conflict continues and Russia faces a global embargo, displaced demand for oil and gas will continue to bolster other companies. The energy sector, in particular energy ETFs, could see significant runway in the months to come. Multi-year highs have the potential to become all-time highs on the current trajectory. 

Is Now a Good Time to Buy Energy ETFs?

The performance of energy ETFs rests largely on the cost of energy. Prices will remain high for the foreseeable future. Therefore, energy ETFs are a strong play for investors seeking to diversify into this sector. And there’s likely to be some degree of pullback as supply and demand ebb and flow. Moreover, macroeconomic factors stand poised to push up the sector as a whole in the year ahead. 

For those unfamiliar with the intricacies of the energy sector and the macroeconomic forces that drive it, energy ETFs are a smart play. Those moving into defensive holdings or looking for safe havens will find them in this sector. Just be sure to investigate ETF holdings and allocations, to understand the key drivers of the fund’s performance. While it’s likely to come from multinational integrated producers like Chevron and ExxonMobil, exposure to other markets within the sector can add much-needed diversification. 

Find the Energy Your Portfolio Needs

The energy sector is far from the sexiest sector to invest in, unless you’re a dividend investor or looking for a defensive hedge. That said, energy ETFs have begun to catch the eye of investors seeking a marriage of performance and stability, especially in the current, uncertain market. Based on prevailing economic factors, now is a good time to bet on energy.